ELASTICITY & INELASTICITY

Elasticity & Inelasticity

Elasticity & Inelasticity

Introduction

Elasticity is a concept economic introduced by the British economist Alfred Marshall, from the physical to quantify the variation in one variable to change another. To understand the economic concept of elasticity we must start from the existence of two variables, among which there is a certain dependency, for example the number of cars sold and the price of cars, or gross domestic product and interest rates. The elasticity measures the sensitivity of the number of cars sold to the price variation thereof, or in the second case the sensitivity to variations GDP interest rates.

That is why elasticity can be understood or defined as the percentage change of a variable X in relation to a variable Y. If the percentage change in the dependent variable is greater than the independent variable X, we say that the relationship is elastic because the dependent variable varies more than the variable X. Conversely, if the percentage change in the variable X is greater than Y, the ratio is inelastic.

Discussion

In a market economy, if you increase the price of a product or service, the quantity demanded of it will fall, and if the price of that product or service, quantity demanded will rise. The elasticity reports the extent to which demand is affected by changes in the price, so there may be products or services for which the rise in price causes a small change in quantity demanded, this means that consumers will buy the same amount, regardless of price changes, demand for this product is an inelastic demand (Barber, 2010). The reverse process is when small variations in the price change much the quantity demanded and then says that product demand is elastic.

For example, the bread has been a typically inelastic in Western culture as it is considered a staple, so that although its price rise dramatically, the demand would not change to the same extent (duplicate the price of the loaf does not cause lower demand in half), while lowering its price would increase demand (the loaf of bread down their price in half will not cause us to consume twice as much bread) (Krugman & Wells, 2006). To determine whether we are dealing with a high-or low elasticity is very important when making decisions regarding prices. If we have a product with inelastic demand, we know we have a wide range of price increases, and that lower prices would not help. If we have a product with elastic demand, we know that lower prices trigger demand, and therefore give better overall results, while a price increase may be a sudden drop in sales.

On the elasticity of demand affect the shelf life, and especially the production. Perfect elasticity characteristic of the goods in a perfect market where no one can affect the price, therefore, it remains unchanged. For the vast majority of goods relationship between price and demand is reversed, ie, the coefficient is negative. Less is usually taken down and the score is performed modulo (Krugman, ...